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2009 Pharmaceutical Outlook

Part 1 - Diversification vs Differentiation Posted on: 23 Jan 09

Summary

Ten years from now the pharmaceutical industry is going to be a very different industry than it is today; and looking back from that point we will see that the foundation for many of the changes to the pharmaceutical business model were laid in 2009. In Part One of a four part commentary on the outlook for 2009, we focus on the choice between portfolio diversification versus new product development.

2009 Pharmaceutical Industry Outlook

Ten years from now the pharmaceutical industry is going to be a very different industry than it is today; and looking back from that point we will see that the foundation for many of the changes to the pharmaceutical business model were laid in 2009. In Part One of a four part commentary on the outlook for 2009, we focus on the choice between portfolio diversification versus new product development.

Part I - Diversification versus Development

This coming year should see pharmaceutical companies moving in one of two directions. Either companies will focus on further diversifying their portfolios with over-the-counter (OTC) and generic drugs (e.g., GSK), or they will direct the majority of their resources towards the development of novel compounds (e.g., Eli Lilly).

Driven by the increasing costs of branded pharmaceutical drugs, both the OTC and generic drug market will see strong growth in the coming years. Pharmaceutical companies that can expand or acquire existing OTC or generic drug operations will be able to use these products to buffer the losses they have been suffering due to mature and expired patents.

What pharmaceutical executives need to be careful of is framing either OTC products or generics as the saviors of their profitability. At the end of the day the business of a pharmaceutical company is the development and sale of branded pharmaceutical products.

Yes, this is a simplistic statement, but nonetheless one that will haunt several of the big drug manufacturers into the next decade.

This is not to say, however, that the companies that focus solely on innovation in 2009 will be in a better place than those companies that chose to diversify. Discovering and developing a new compound is an expensive and uncertain process. Few products in development make it to market, and those that do need to be profitable enough to recoup not only the cost of their development, but also that of the products that failed to leave the laboratory.

The freedom that pharmaceutical companies have to set prices in the US market has historically paid for the innovation of new products, but as will be discussed in the next part of this series, we would be smart to question how much longer the lack of restrictions on pricing in the US is going to last…

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